Impact of ASIC on BTC price - Lowering the Marginal Cost of Production

[nrd525]

It looks like there are several reliable projects to develop an ASIC for bitcoin.

What will the impact of this be on the BTC price?

I think the impact could be very different from previous technological developments as for ASIC there is a very low marginal cost of production, and (from what I've heard) no other use for the devices.  FPGAs and GPUs could be sold on the open market.  FPGAs look harder to resell than GPUs (based on how many are selling on Ebay), but it is still possible.

FPGA has a lower marginal cost than GPU, but they don't have a huge fixed development cost, nor do they promise the massive gains in efficiency that people are expecting from ASIC.

The result of this is that ASIC owners will be willing to produce BTC at an overall loss (a loss over the lifetime of the entire investment).  They will be making the BTC at a variable / marginal profit (costs of electricity will be less than the BTC produced), but the overall cost of buying the ASIC (and computer) will exceed the total returns.

I'm not saying that ASIC owners will lose money, I'm just thinking that it could happen.  If this happened, would it cause the BTC price to fall?  At a minimum it would remove money from BTC miners, and thus from the BTC economy.

If one ASIC project gets its product out the door first - they might enjoy a long enough monopoly for owners to make money.  If several ASIC projects release their product at around the same time, we could see a price war.  The price of the ASIC product will fall to near the marginal cost of production (unless the ASIC producers form a cartel), and the ASIC projects will lose money (and not recoup their development cost).  In addition, the network hashing power will go through the roof.

If ASIC projects lose money, it will remove money from the BTC economy.

Even if there are just two ASIC projects, it makes sense for them to compete on prices if the marginal cost of production is low.

I'm tentatively thinking the only solutions that will lead to profit is for there to be only one ASIC company, a cartel, for ASIC projects to buy each other out, or for there to be several ASIC companies that have different niches.  But I'm not sure what the niche would look like.  How it would be strong enough to stand against the economics of a low marginal cost of production?

[FreeMoney]

I guess I can't say why, but It seems really obvious there will be multiple ASIC projects. Even if there is only one, that one is already (or soon) selling to the public.

Anyone selling coins is competing on price with everyone else selling coins, not just people who will mine them efficiently in the future so even if there was only one ASIC producer at this point they will pretty much never have most of the coins. They'll always be competing with the old 9000000 coins and with any coins they ever sell.

[P4man]

There wont be an impact on price.
But there will be a huge impact on mining profitability.
Miners ROI is dependent mainly on two factors: bitcoin price and difficulty (to some extent, electricity cost, but for asics that will become a non issue).

GPUs and FPGAs have a price that is relatively fixed independently of the bitcoin network. So for a given bitcoin exchange rate, you can more or less predict what difficulty will be like and how many GPUs or FPGAs rational miners will buy. You could be wrong a factor 2 or 3, but not by orders of magnitude, difficulty is not going to go to 15 million at the current price with current technology.

But for asics, all that goes out of the window. The market value of asics is utterly dependent on the bitcoin network. And, given the quantum leap in performance they should offer, bitcoin difficulty will be utterly dependent upon how many asics these suppliers will chose to sell.. and the circle is round. The only way to predict ROI of an ASIC farm is knowing how many ASICs will be sold. But as you rightly point out, marginal cost for asics is as good as zero.

#DIV/0

Its a problem.

Put differently, if I offer you a 1TH ASIC server for $100.000, you may think you get a insanely good deal. And you would, until you find out Im selling 100s or 1000s of those, and you find your 1TH will generate only a tiny fraction of what you expected when you bought it.

And as an asic supplier, to maximize profits and get a ROI on the large investment, I would sell those first machines for $10 or $100K (look at LargeCoin). Then as difficulty begins to rise, market value for that same level of hash rate will go down accordingly, and so I will adjust my prices; thats not a problem for me as a supplier since my marginal cost is so low, so I will keep lowering them until after a long time I get somewhere near marginal costs. Good luck to that first customer to break even on his $100K investment.

[lonelyminer (Peter Šurda)]

The market price is not determined by production costs. It's the other way around: market prices of consumer goods influence the decisions of production processes and costs.

When ASIC mining gets widespread, the same thing would happen as when GPU mining outpaced CPU mining: the difficulty rises and the producers that produce above marginal costs would fall out.

[proudhon]

The market price is not solely determined by production costs.

Additionally, as I've expressed elsewhere, I think that lowering the marginal cost of production will lead to a price war that does put downward pressure on the price.  The only question to my mind is whether demand will pick up sufficiently to overcome the downward pressure.

[P4man]

I think that lowering the marginal cost of production

What makes you think the production cost of bitcoins will be lowered? If anything, the opposite is more likely, with large gpu and fpga farms going out of business and high investments in asics that may never pay themselves back as the difficulty will keep going up. Once asics are here, electricity cost will be a moot point, so no one will shut down their asic miners, even if they have no hope of ever recovering their investment. They will continue "producing" at a loss, if you factor in their investment.  Once in a while a faster and/or cheaper device may arrive with the promise of being profitable again, some people may buy in to it, but then the supplier of those chips will produce "too many" (they cost next to nothing to produce anyway) and there goes your profitability again.

My guess is 6 to 12 months after the first asics are available, no miner will be profitable, ever again.  But I cant see how that would impact the price, since supply will still be a steady 50/25/12.5 BTC per block.

[proudhon]

I think that lowering the marginal cost of production

What makes you think the production cost of bitcoins will be lowered? If anything, the opposite is more likely, with large gpu and fpga farms going out of business and high investments in asics that may never pay themselves back as the difficulty will keep going up. Once asics are here, electricity cost will be a moot point, so no one will shut down their asic miners, even if they have no hope of ever recovering their investment. They will continue "producing" at a loss, if you factor in their investment.  Once in a while a faster and/or cheaper device may arrive with the promise of being profitable again, some people may buy in to it, but then the supplier of those chips will produce "too many" (they cost next to nothing to produce anyway) and there goes your profitability again.

My guess is 6 to 12 months after the first asics are available, no miner will be profitable, ever again.  But I cant see how that would impact the price, since supply will still be a steady 50/25/12.5 BTC per block.

Maybe I should have said "operating costs"..?  What I've suggested in the past, and what I'm suggesting here now, is that FPGAs and ASIC miners will push GPU miners out leaving only miners whose operating costs are low.  To cover their day to day operating costs they'll compete with each other to sell what they produce, and if demand doesn't pick up, they're competition to pay their day to day costs will push the price down.

Of course, you could look at it the other way round.  Because the costs of entering the market as a miner will be higher, they'll all eat their day to day costs to an extent, and save most of what they produce on the speculation that at some future date the price will be much higher and they can use a portion of their saved production to pay off all the remaining initial investment.  If enough of them do this, supply could dry up enough that even current demand pushes the price up.

[Fuzzy]

The application of bitcoin will judge the price. Whether they're worth $1 or $100, you need investors with cash to give them value, and if the investors don't see any value, there will be none, as is the case with LiteCoin presently.

In my personal opinion, there will be value, and the block split in early December will put a choke on fresh supply.

However, for the GPU miners, their 'cut' of this supply will be too little to cover average electricity costs, even at a high trading price.

On the other hand, I think people are over-estimating the efficiency/performance of first-gen ASIC devices.

[mtminer]

I think that lowering the marginal cost of production

What makes you think the production cost of bitcoins will be lowered? If anything, the opposite is more likely, with large gpu and fpga farms going out of business and high investments in asics that may never pay themselves back as the difficulty will keep going up. Once asics are here, electricity cost will be a moot point, so no one will shut down their asic miners, even if they have no hope of ever recovering their investment. They will continue "producing" at a loss, if you factor in their investment.  Once in a while a faster and/or cheaper device may arrive with the promise of being profitable again, some people may buy in to it, but then the supplier of those chips will produce "too many" (they cost next to nothing to produce anyway) and there goes your profitability again.

My guess is 6 to 12 months after the first asics are available, no miner will be profitable, ever again.  But I cant see how that would impact the price, since supply will still be a steady 50/25/12.5 BTC per block.

Electricity will always be a factor. If your ASIC does 1,000 times the work as a gpu but difficulty goes up 1,000 times or more your back in the same boat cost wise.

GPU: 100: 0.32 USD/24h@100MHash/s
ASIC 100: 0.00032USD/24h@100MHash/s

If you have to buy the hardware from a provider your $1,000 is only going to produce the same amount of BTC as your old gpus did. The best you can  hope for is a 2-4 weeks before everyone catches up if you get some of the first units.

[matthewh3]

I think the first ASIC's are going to be very expensive like OpenASIC is looking at $3,000@8GH/s@100W.  You have to be very interested in bitcoin and be wealthy to spend $3,000 outright on it but my GLBSE listed mining company RSM will be putting forward the motion to pre-order one.  As OpenASIC is not expected to ship until December at the earliest but they may start taking pre-orders in August.  Tho after the block reward half's and ASIC's come out it definitely throws GPU mining profitability out of the window. 

[P4man]

Electricity will always be a factor. If your ASIC does 1,000 times the work as a gpu but difficulty goes up 1,000 times or more your back in the same boat cost wise.

Eventually, it will matter again. But not before ASICs have plummeted in price. In the beginning the purchase cost per GH will completely dwarf the electricity cost of asics. In the longer run as difficulty explodes, ASIC prices will tumble and electricity might become a factor again. 

But for most existing ASIC miners, that will just add insult to injury. Whether or not they can still mine profitably vs electricity cost, may seem as moot as whether or not your $500 android phone earns more mining litecoins than it consumes in electricity.

[nrd525]

P4man - I generally agree with you.  I think you also need to take into account what bitcoin miners losing lots of money will have on the bitcoin economy.  I think some of the people who lose money will lose interest in bitcoin completely, and others will have less money to spend.  Bitcoin depends on a community to succeed and a strong percent of that community is the miners.

I think many people are under the false impression that this will be like the transition from CPU to GPU.  They don't understand the dangers of a high fixed product cost and very low marginal cost.

My latest theory is that even if there is just a single ASIC company the mining industry could have major problems.   Competition between two ASIC projects is not necessary for the miners to face major losses.  A single company will start by selling a small number of ASIC devices at a price that is only slightly better than FPGAs and GPUs.  This will drive a small number of miners out of business (those with high electricity costs), but not everyone and thus cause the network hash rate to increase.  Then the company will reduce its price (or increase the hash rate of its product) so that miners can still make money from it.  This will cause the hash rate to increase further.    This will continue until the network has rate has increased by a factor of 10 to 500, all of the GPU and FPGA miners are driven out of business, and people have lost at least several hundred thousand dollars (total guess).  If there are two or more ASIC companies, the loss will be in the millions (another guess).

[jjshabadoo]

I've wondered if FPGA's even make sense considering how rapidly they are developing. ASIC is surely an economic dead end for miners as p4man has stated. CPU's and GPU's are well established technologies which have not undergone gigantic performance leaps, especially GPU's when you consider the 5970 is only surpassed in efficiency by a 7970 and not by a very wide margin. We're talking a card which came out 2 generations before the 7970 and over 2 1/2 years ago.

Does anyone believe FPGA devices won't be far superior to current ones in even 6 months and at lower prices? Also factor in how easy it is to add an FPGA to a regular desktop as compared to tweaking and dealing with GPU's ?(overclocking, maximizing electrical efficiency, etc.) FPGA's are just so plug and play that someone with limited computer skills is far more likely to consider buying and installing one since they can just plug it into their home computer and go.

The electricity cost was a major variable cost which acted as a sort of governor combined with a mature technology(GPU's) that limited how many people could obtain, implement and mine profitably with it.

I can't understand how at the very least FPGA's and ASIC won't stall the total hashrate of the network at some point if people act rationally in purchasing these.

What is the current ROI on early versions of the x6500, icarus or ztex boards ?

[yochdog]

I think our only hope is that the ASIC manufacturers think rationally about the future market for their product, and do the following:

Price their respective ASIC's to be cheaper on a $/GH, but not by very much.  This will discourage a mass stampede of miners extrapolating imediate results out to infinity and therefor crushing all mining profitability. 

I think of it this way:  I can buy 100x 5970's and the corresponding hardware for lets say $35,000 and generate 70 GH/s.  Thus I am paying $500/GH.  If I can go buy an ASIC that gives me the same 70 GH/s for $20,000, myself and every other miner of means is going right out and buying it.  In doing so, we ensure our own destruction. 

The only thing that will prevent this is keeping the projected ROI on new ASIC investment relatively close to that of GPU's.  It is better for the ASIC manufacturer (higher profit), as well as all miners (sustainability).  It is a rare win/win.

I hope the BFL boys have thought this through.  Keeping GPU miners around is in their best interests.   

[P4man]

I think our only hope is that the ASIC manufacturers think rationally about the future market for their product, and do the following:

Price their respective ASIC's to be cheaper on a $/GH, but not by very much.  This will discourage a mass stampede of miners extrapolating imediate results out to infinity and therefor crushing all mining profitability. 

At whatever price point they decide upon initially, BFL have to sell for a significant amount of money, as they have a substantial NRE to make up. If the price is perceived as too high per MH and GPUs and FPGAs remain too competitive, I doubt they will generate the sales they need fast enough. Remember, BFL have to worry about a potential competitor too, they cant risk spreading their ROI over 5+ years.

So IMHO network hashrate will go up inevitably if BFL is to make a decent return on their investment. Once this effect becomes big enough, BFL will have to lower prices to keep selling boxes, which will further increase difficulty, etc, etc. I dont see how it can be avoided. High initial prices may slow down the effect initially as GPUs are being replaced by ASICs, but if you look in the BFL pre announcement thread, miners seem to be falling over themselves to buy.

More over, high initial prices will also make it even more likely that early adopters will get buried.  If the payback time at current difficulty is on the order of 12 months, there is IMO no chance whatsoever for them to break even - ever. If its much shorter, lots of ignorant miners will buy them in droves even though I suspect 4 months break-even time may still be suicidal. Not enough people truly understand the problem and the difficulty increase will be created by the ones that dont.

The only thing that will prevent this is keeping the projected ROI on new ASIC investment relatively close to that of GPU's.  It is better for the ASIC manufacturer (higher profit), as well as all miners (sustainability).  It is a rare win/win.

I dont think its better for the asic manufacturer to maintain high prices for long. I agree to maximize their profits, they should price them as high as the fool is willing to pay upon release, but once the "biggest fools" stop buying, they will have to drop prices. Not selling boxes is not in BFLs interest either.

I hope the BFL boys have thought this through.  Keeping GPU miners around is in their best interests.   

I raised the question in the pre announcement thread, and BFL-engineer didnt seem to grasp the problem, or pretended not to. Doesnt bode well. But even if/when BFL sees the problem, its something else to come up with a solution. As long as BFL has a monopoly, they may decide to sacrifice some of their profitability to make sure the market remains healthy: they could impose limits on their sales and not sell more than x TH per y months, even if there is demand. But if/when a competitor emerges, then you simply cant solve it IMO.

[MoneyIsDebt]

What about alternate blockchains? Can't the hardware be refitted to work on other currencies? Or folding proteins or finding aliens or curing cancer or something?

[P4man]

I don't see how ASICs lose money for a miner.

You have to take the purchase in to account. If it takes 200 years to pay itself back without electricity costs, I wouldnt call that profitable. And if asics get sold anywhere near MH/$ of todays solution, that will very likely be the case.

If you spend 100 million on developing ASICs thats $5 per coin right there.

If you spend $800 million on bailing out banks, thats $40 per coin. So what?

[proudhon]

I don't know if this sort of thing is possible, but what would be really interesting would be GPU manufacturers entering the game somehow.  They certainly have the means for the R&D whether or not such a thing is a worthwhile project (probably not).  It was interesting and a little bit shocking to see AMD recognize bitcoin mining as a feature of its 7xxx series GPUs - e.g. "Fold and mine faster than ever with AMD App Acceleration powered by the unprecedented 28nm GCN Architecture.".

[nrd525]

Marginal Cost is the change in total cost that arises when the quantity produced changes by one unit (http://en.wikipedia.org/wiki/Marginal_cost -- Wikipedia).  This is the cost AFTER you have paid for your hardware.  For bitcoin, this is the cost of electricity, maintenance (replacement parts), and rent (if you are renting a facility).

The Average Cost includes the cost of the hardware.   For bitcoin, especially with ASIC, it will greatly exceed the marginal cost. Perhaps by as much as a factor of 10-100.

The problem is that the hardware is a fixed cost.  So people will keep making bitcoins so long as the marginal cost is equal or greater to the marginal production.  With market competition, the value of the marginal production will fall until it equals the marginal cost.

[P4man]

However I didn't realize how expensive ASIC was going to be. I thought it would be cheaper.

Asics costs a lot to develop, and close to nothing to produce.  Thats a problem, since they are worth a lot at current prices/MH, so there is no reason for a supplier of asics to not price close to market rates. That means there is an enormous gap between initial prices (per MH)  and future prices, because as difficulty goes up, prices per MH will tumble, and difficulty will skyrocket further. An asic vendor has almost unlimited ability to drop prices  to adjust for difficulty,  and it will need to, as difficulty rises. SO he also has an interest in, and ability to push up difficulty by orders or magnitude. That makes it a highly risky purchase for a miner, his investment is bound to lose value far faster than most people will anticipate and probably too fast to make a positive ROI.